How Has the Euro Fared After Ten Years? 5 comments
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January 1, 2009, is the tenth birthday of the euro. On this occasion, everyone has been taking stock. The record of the euro shows both pluses and minuses. Looking back, the euro has in many ways been more successful than predicted by the skeptics — many of them American economists. The historic transition to a monetary union among 11 countries in 1999 went smoothly; the euro instantly became the world’s number two international currency; and the officials of the European Central Bank (ECB) have from the beginning worked as citizens of Europe rather than as representatives of home constituencies. After a rocky start, the euro has achieved a strong value; the ECB has achieved a strong reputation (the tradition of the Bundesbank has not been diluted as feared); and new members to the East have achieved membership in the club. Slovakia becomes the 16th country to join, on January 1.
At the same time, however, some of the skeptics’ warnings have come to pass: shocks have hit members asymmetrically; cushions such as US-type labor mobility have not developed; and the Stability and Growth Pact has proven unenforceable. Furthermore, the popularity of the project with the elites does not extend to the public, many of whom are convinced that when the euro came to their country, higher prices came with it.
One of the most interesting questions at the inception of the euro was whether the elimination of currency risk and of foreign exchange transaction costs would promote trade among members. Facilitating trade had been one of the most important of the original motivations of founders. Prior to 1999, however, most economists believed that the effects of currency barriers between countries, if even greater than zero, were small — small, for example, relative to trade barriers.
In 2000, Andrew Rose published in Economic Policy what turned out to be one of the most influential empirical papers of the decade: “One Money, One Market…” Applying the gravity model to a data set that was sufficiently large to encompass a number of currency unions led to an eye-opening finding: members of currency unions traded with each other an estimated three times as much as with otherwise-similar trading partners. Many found the tripling estimate implausibly large. No sooner had Rose written his paper than the brigade to “shrink the Rose effect” (the phrase is from Richard Baldwin) – or to make it disappear altogether — descended en masse. But their plausible methodological critiques can be answered. Authors tended to replicate the finding with a twist. Although they came away denting the magnitude of the estimate, few studies, if any, managed to shrink the estimated effect of currency barriers below the estimated effect of trade barriers.
This research was of course motivated by the coming of the euro in 1999, even though estimates were necessarily based on historical data from (much smaller) countries who had adopted (or left) currency unions in the past. But now, 10 years later, we have enough data to see the extent to which the trade-promoting effect that currency unions have showed among smaller countries also carries over to European countries. This will be the subject of my next post to follow.
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This article has 5 comments:
What was the Euro/USD relation at introduction? How low did it go and how high? Then show where it is now in relation to its history.
Please posit what the effects have been with the entry of so many additional members ala the Baltic States etc. and the reluctance of the British to join.
The problem one faces when attempting an analysis such as this is that there is no experimental control: We do not have a counter-example of Europe without the Euro with which to make comparisons. The comparisons are inevitably between the years before the Euro to the years after.
Before 1999 we had the fall of the Soviet Union, with the resulting quiescent Russia of the 90's, an infantile China, and a burgeoning new internet economy emanating from America. Since 1999 we have had a resurgent Russia, a burgeoning China, two bubbles and their bursting in America and spreading thoughout the world.
I know it is a tall order, but can you attempt, at least in a gedanken experiment, to isolate the influence of the Euro from all of these other factors.
All that being said, I look forward reading the rest of your work on this subject.
Here is Sweden the Euro was rejected because after being fools and joining the EU, a large majority of voters recognized that what all this is really all about is employment - i.e. jobs. Jobs for parasitic politicians and civil servants in Brussels and e.g. Frankfort. As for this paper by Rose - whoever that is - in which he applied a 'gravity' model to something, I suddenly remembered that since only a handfull of people read academic papers, I won't even try to find out what a gravity model means on this or any other occasion, although I seem to remember running into that expression when I worked in Geneva, and concluded that it was nonsense, given the context in which it was used.
Let me conclude by saying what I said to Robert Mundell when he gave his Nobel talk at this university. "We don't need no_____ currency union", since Mundell was dumb enough to think that what was needed was a one currency world.
Ferdinand E. Banks
I really do not understand why the Europeans expected the Eurozone to be viable.